Commodity prices diverge as China tackles climate change
In July, commodity markets were generally buoyant. However, August saw weakness in many markets, with iron ore prices crashing by 25% m/m, demonstrating how Chinese sentiment remains a force to be reckoned with.
Brent oil, copper and nickel were all down 3% m/m by the end of the month, with aluminium a notable exception. Prices rose 3% to a ten-year high.
The fall in iron ore prices was mainly driven by weak demand, with Chinese steel production cut by 8% y/y in July, one of the largest falls in the past 20 years. Furthermore, provisional data suggests that August will also be weak, with government data showing a 9.5% drop in the first ten days of the month.
Potentially this could signal that the long-awaited peak in Chinese steel is finally here, as the country tries to reduce coal consumption and boost its output of recycled metals. China accounts for 54% of global steel output.
The recent drop in Chinese steel production has broader implications for the metals complex. The reduction shows that the country is serious about tackling climate change and using its resources more efficiently.
In recent months, damaging floods in China have heightened anxieties about the impact of extreme weather on the country, and coal burning is undoubtedly adding to the problem.
Chinese primary aluminium imports have been trending higher, supporting the idea that domestic smelters – heavy coal users – are being kept on a tight leash. Over the past ten years, net imports typically ranged between zero and 50kt per month. This year has seen a surge to an average of 124kt per month.
Over the same period, China has switched from being a net exporter of secondary aluminium to a significant net importer for the first time. Leading producer Rusal recently estimated that the Chinese secondary aluminium production would expand from 8Mt in 2020 to 20Mt by 2030 if all existing projects are approved.
This expansion would help to reduce thermal coal consumption and have negative implications for sellers of primary aluminium, alumina and bauxite. China has stated that it wants to cap primary aluminium output at 45mt, compared to 37mt in 2020.
Finally, copper prices edged lower this month. Concerns about strike action at Escondida – the world’s largest mine – have dissipated, with an agreement reached between BHP and workers. Meanwhile, treatment charges continue to trend upwards, indicating that global mine supply growth is now outpacing smelter demand. According to Fastmarkets, treatment charges reached a 15-month high in August.
We expect China to continue to exert a powerful influence on steel and the base metal markets in the months ahead. Winter production cuts for steel are looming, which is likely to keep iron ore prices under pressure.
By contrast, aluminium prices look set to remain buoyant as the global automotive market has recovered and China is keeping a close eye on domestic producers